Question

We describe a perfectly competitive firm as a price taker and a monopoly firm as a price setter. Why?

Answer 1

In a perfect market condition there are many firms in the market and each firm is selling a homogeneous good that is a perfect substitute to each other. Here, the demand is perfectly elastic and all the consumers knows about the market conditions very well. So, its the supply and demand for the goods that will decide the price of the product and the firm can only manage the quantity they can supply at that price.

On the other hand, in a monopoly, there is only a single firm selling the good that has no substitute and cross price elasticity is zero. Here, to maximise the profit the monopoly can adjust the supply of the goods in the market and manipulate the price. Hence he searches for the price where the Marginal cost and the marginal supply are equal .